The Bank of Russia raised unexpectedly its benchmark one-week repo rate by 25 bps to 7.75 percent on December 14th, saying the decision is aimed at limiting inflation risks that remain elevated, especially over the short-term horizon on the back of the upcoming VAT rate increase. Policymakers expect annual inflation to be 5-5.5 percent by the end of 2019, before returning to 4 percent in 2020.

Excerpts from the Information Notice of Bank of Russia:

At the end of 2018, inflation is expected to be close to 4%, which corresponds to the Bank of Russia’s target. In November, the annual consumer price growth rose to 3.8% (3.9%, according to the estimates as of 10 December). This November’s upward movement of inflation was largely driven by annual food price growth accelerating from 2.7% to 3.5%. This was supported by changes in the balance of supply and demand in certain food markets. Prices are further adjusting to the ruble exchange rate that has weakened since the beginning of the year. Consumer price growth is starting to be affected by the VAT increase scheduled to take effect from 1 January 2019. According to Bank of Russia estimates, most inflation indicators reflecting the most sustainable price movements are growing.

The price expectations of businesses increased, triggered by the weakening of the ruble which took place since the beginning of the year and the forthcoming VAT rise. Household inflation expectations rose in November. Uncertainty persists over their subsequent movements.

The Bank of Russia’s forecast assumes consumer price growth rate at 3.9-4.2% by the end of 2018. The VAT hike and the weakening of the ruble that took place in 2018 are expected to trigger a temporary acceleration in annual inflation, which will peak in the first six months of 2019 and run at 5.0-5.5% by the end of 2019. Quarterly year-on-year consumer price growth will draw close to 4% as early as the second half of 2019. Annual inflation will slow down to 4% in the first half of 2020 when the effects of the ruble’s weakening and the VAT rise peter out. The increase in the key rate is proactive in nature and will help limit the risks of firm inflation anchoring at the level significantly exceeding the Bank of Russia’s target. The forecast takes into account the Bank of Russia’s decision to resume regular foreign currency purchases in the domestic market under the fiscal rule from 15 January 2019.

Russian economic growth slowed down slightly, remaining close to its potential. In 2018 Q3, annual GDP growth slipped to 1.5%, consistent with the Bank of Russia’s forecast, mostly due to the high base effect in agriculture. Industrial output continued its annual growth in October with sectoral trends remaining mixed. Consumer demand growth slowed down, as compared to previous months. Its expansion is largely based on the non-food sales. Investment activity continued to rise in the third quarter. The Bank of Russia keeps unchanged its 2018 annual GDP growth forecast of 1.5-2%.

The Bank of Russia’s view of the Russian economy’s mid-term growth prospects has remained mainly unchanged. Due to the budget rule, the decrease in the 2019 average annual oil price from 63 to 55 US dollars per barrel in the baseline scenario will have little influence on macroeconomic fundamentals. In 2019, the forthcoming VAT increase might have a slight constraining effect on business activity (mostly in the beginning of the year). The newly attracted budgetary funds will be used to boost government spending, including spending on investments, as early as 2019. As a result, according to the Bank of Russia forecast, GDP growth in 2019 will range between 1.2% and 1.7%. The following years might see higher growth rates as the planned structural measures are implemented.

Russia's gross domestic product grew by 1.5 percent year-on-year in the third quarter of 2018, up from a preliminary estimate of 1.3 percent and following a 1.9 percent expansion reported in the previous three-month period.

Russia’s annual inflation rate rose to 3.8 percent in November 2018 from 3.5 percent in the previous month, still below market expectations of 3.9 percent. It was the highest inflation rate since July 2017 on the back of rising prices of food and non-food products while service inflation eased.

Within the goods component, food cost advanced 3.5 percent in November, following a 2.7 percent rise in October and prices of non-food products rose 4.2 percent, after a 4.1 percent gain in the previous month. Meanwhile, services inflation slowed to 3.8 percent in November from 4 percent in October.

Annual core inflation rate climbed to 3.4 percent in November from 3.1 percent in the previous month. It was the highest rate since June 2017.

On a monthly basis, consumer prices increased 0.5 percent in November, compared with a 0.4 percent gain in October and matching market consensus. There were rises in prices of both food (1 percent vs 0.6 percent in October) and non-food products (0.4 percent vs 0.5 percent) while services costs were unchanged (vs -0.1 percent in October).

Russian unemployment rate rose to 4.7 percent in October 2018 from an all-time low of 4.5 percent in the previous month, and compared to last year's figure of 5.1 percent. The number of unemployed increased by 5.2 percent from a month earlier.

The number of unemployed rose by 177 thousand to 3.611 million in October from 3.434 million in the previous month. Compared with the previous year, unemployment fell by 248 thousand from 3.859 million.

Russia's real wages increased by 4.4 percent year-on-year in October, following a downwardly revised 4.9 percent advance in the previous month and below market expectations of a 6.8 percent gain. Average nominal wages jumped 8.1 percent to RUB 42,000 while annual inflation rate rose to 3.5 percent, its highest level since July 2017. Meanwhile, real disposable personal income in Russia increased by 1.4 percent in October, following a 2.5 percent drop in the previous month.

Russia's gross domestic product grew by 1.3 percent year-on-year in the third quarter of 2018, following a 1.9 percent expansion reported in the previous period, a preliminary estimate showed. Retail trade, cargo turnover and industrial production grew at a slower pace while agriculture and construction output contracted.

According to preliminary data from the Ministry of Economic Development, retail trade growth eased to 2.6 percent in Q3 from 2.9 percent in the previous period and freight turnover of transport expanded at a softer 2.9 percent, compared to 3.4 percent. In addition, industrial production increased by 2.9 percent, also slower than a 3.2 percent advance recorded in the previous quarter due to a slowdown in manufacturing (2.2 percent vs 4.3 percent). Utilities continued to grow at the same pace (0.5 percent) while an acceleration was seen in both mining (4.9 percent vs 2.2 percent) and water supply (4.1 percent vs -1.9 percent).

On the other hand, agriculture contracted 6.1 percent in the third quarter (vs 1.9 percent in Q2) and construction shrank 0.4 percent (vs 0.9 percent in Q2).

Russia’s annual inflation rate rose to 3.5 percent in October 2018 from 3.4 percent in the previous month, still below market expectations of 3.6 percent. It was the highest inflation rate since July 2017 boosted by prices of food, non-food products and services.

Within the goods component, food cost advanced 2.7 percent in October, following a 2.5 percent rise in September and prices of non-food products rose 4.1 percent, after a 4 percent gain in the previous month. Also, services inflation went up to 4 percent in October from 3.8 percent in September.

Annual core inflation rate climbed to 3.1 percent in October from 2.8 percent in the previous month. It was the highest rate since July 2017.

The Bank of Russia held its benchmark one-week repo rate at 7.5 percent on October 26th after an unexpected 25 bps hike in the previous meeting, saying pro-inflationary risks remain elevated and uncertainties over future external conditions persist. Policymakers expect annual inflation to be 5-5.5 percent in 2019, before returning to 4 percent in 2020.

Excerpts from the Information Notice of Bank of Russia:

Annual inflation is on track to return to 4%, consistent with the Bank of Russia forecast. The annual rate of consumer price growth totalled 3.4% in September (3.5% according to the 22 October estimate). This September’s upward movement of inflation was largely driven by annual food price growth accelerating to 2.5%. This was supported by changes in the balance of supply and demand in certain food markets. Also, prices are adjusting to the ruble exchange rate that has weakened since the beginning of the year. According to Bank of Russia estimates, most annual inflation indicators reflecting the most sustainable price movements are growing.

The price expectations of businesses remain heightened, triggered by the weakening of the ruble which took place since the beginning of the year and the forthcoming VAT rise. Household inflation expectations, albeit lower in October, are markedly above the current year’s average Q1-Q2 readings. Uncertainty persists over their subsequent movements.

The domestic financial market saw a stabilisation in the second half of September and in early October, with exchange rate volatility declining. This was helped by the Bank of Russia’s September decision to raise the key rate and suspend foreign currency purchases in the domestic market under the fiscal rule through the end of 2018, as well as a certain stabilisation in the external environment.

The Bank of Russia forecast assumes consumer price growth rate at 3.8–4.2% by the end of 2018. One-off factors are expected to trigger a temporary acceleration in annual inflation, which will peak in the first six months of 2019 and run at 5.0-5.5% by the end of 2019. Quarterly year-on-year consumer price growth rate will draw close to 4% as early as the second half of 2019. Annual inflation will slow down to 4% in the first half of 2020 when the effects of the ruble’s weakening and the VAT rise peter out.

The Russian economy is growing at rates close to its potential. This September saw a rise in industrial output; sectoral output trends remained mixed, however. Consumer demand expanded at moderate rates, mainly on the back of non-food sales. Bank of Russia estimates show that investment growth was continued in the third quarter. The Bank of Russia keeps unchanged its 2018 annual GDP growth forecast of 1.5-2%.

The balance of risks remains skewed towards pro-inflationary risks, especially over a short-term horizon. The stabilisation in the domestic financial market comes with continuing uncertainty over future external conditions and their impact on financial asset prices.

Russian unemployment rate dropped to a fresh record low of 4.5 percent in September 2018 from 5 percent in the corresponding month of the previous year, below market expectations of 4.7 percent. In August, unemployment rate was higher at 4.6 percent.

The number of unemployed declined by 72 thousand to 3.434 million in September from 3.506 million in the previous month. Compared with the previous year, unemployment fell by 385 thousand from 3.819 million.

Real wages in Russia increased by 7.2 percent year-on-year in September, following a downwardly revised 6.8 percent advance in the previous month and above market expectations of a 6.4 percent gain. Average nominal wages surged 10.8 percent to RUB 42,200 while annual inflation rate rose to 3.4 percent, the highest level since July 2017. Meanwhile, real disposable personal income in Russia decreased by 1.5 percent in September, following a 0.9 percent drop in the previous month.

Russia’s trade surplus widened to USD 15.80 billion in August of 2018 from USD 6.66 billion in the corresponding month of the previous year, and above market consensus of a USD 15.0 billion surplus.

Exports jumped 28.7 percent to USD 37.44 billion in August from USD 29.08 billion a year ago, as exports to non-CIS countries climbed 30.8 percent to USD 32.69 billion and those to CIS countries went up 16.3 percent to USD 4.75 billion.

Imports fell 3.5 percent year-on-year to USD 21.64 billion, the first annual decline since July of 2016. Imports from non-CIS countries decreased 4.1 percent to USD 19.42 billion while those from CIS countries advanced 2.6 percent to USD 2.22 billion.

The trade surplus with non-CIS countries grew 179.5 percent to USD 13.27 billion from USD 4.75 billion a year ago; and with CIS countries it widened 31.82 percent to USD 2.53 billion from USD 1.92 billion.

Russia’s annual inflation rate rose to 3.4 percent in September of 2018 from 3.1 percent in the previous month, slightly above market expectations of 3.3 percent. It was the highest inflation rate since July of 2017, mainly due to food prices.

Within the goods component, food cost advanced 2.5 percent in September, up from a 1.9 percent rise in August; and prices of non-food products rose by 4 percent, following a 3.8 percent gain in the prior month. Also, services inflation went up to 3.8 percent in September from 3.7 percent in August.

Annual core inflation rate picked up to 2.8 percent in September from 2.6 percent in the previous month.

On a monthly basis, consumer prices went up 0.2 percent, higher than market consensus of 0.1 percent and after showing no growth in August. Prices advanced faster for non-food products (0.4 percent from 0.2 percent in August) and cost fell less for food (-0.1 percent from -0.4 percent). Meanwhile, prices slowed for services (0.2 percent from 0.3 percent).